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Written by Robert Quinn
Founder & CEO

In February, the Securities and Exchange Commission (“SEC”) has proposed rules requiring firms to report large security-based swap positions and re-proposed stronger anti-fraud and manipulation provisions in the swap markets. In a continued effort to prevent fraud and manipulation, the SEC has re-proposed Rule (“Rule 9j-1”) under the Securities Exchange Act of 1934 (“Exchange Act”), would provide that:

(1) a person with material non- public information about a security cannot avoid liability under the securities laws by making purchases or sales in the security-based swap (as opposed to purchasing or selling the underlying security), and

(2) a person cannot avoid liability in connection with a fraudulent scheme involving a security-based swap by instead making purchases or sales in the underlying security (as opposed to purchases or sales in the security- based swap).

The proposed rules come in light of the observations of the market over the past decade where the SEC and the market observed “manufactured credit events and other opportunistic events in the credit default swap markets. In June 2019, the SEC, the CFTC and the FCA issued a public statement stating that the “continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as ‘manufactured credit events,’ may adversely affect the integrity, confidence and reputation of the credit derivatives markets, as well as markets more generally”.

To combat such events and increase transparency, proposed Rule 10B-1 would require any person that owns a security-based swap position (“SBS position”) exceeding a reporting threshold amount to promptly file on the EDGAR system a statement containing the information required by Schedule 10B. All 10B-1 EDGAR filings would be made available to the public.

The proposed rules set the thresholds at:

  1. Credit default swaps (“CDS”) – the least of:
    • A long notional amount of $150 million (subtracting the notional amount of long positions in underlying deliverable debt securities),
    • A short notional amount of $150 million, or
    • A gross notional amount of $300 million
  1. Debt securities that are not CDS – a gross notional amount of $300 million
  2. SBS positions based on equity securities – generally the lesser of:
    • A gross notional amount of $300 million (with certain inclusions and adjustments), or
    • An SBS equivalent position that represents more than 5% of a class of equity securities

These new reporting requirements will reiterate the SEC’s goal to prosecute fraud and manipulation and provide a new transparency into SBS events deemed to be manufactured.

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